Align Technology, Inc. (NASDAQ:ALGN) has had an incredible run over the past decade. ALGN stock is up 25x off the financial crisis, and up almost 10x just since 2013.
The company has sported some amazing results over the past five years operationally. It has grown revenues by almost 18%/year compounded. And bolstered by some successful patent fights and skillful management, they’ve grown earnings even faster.
EPS is up almost 22%/year over the past five years.
And Wall Street sees things getting even better. Analyst consensus has Align growing earnings at 29%/year over the next five years. Normally as a company expands, it’s growth rate slows down. In this case, the street is betting ALGN stock has even better days ahead of it.
I’m here to tell you why they’re wrong, the company is running through its pool of most attractive customers, and overseas growth will disappoint.
Consumer Financing: A Headache
In a recent presentation, Align noted that the price point is a major deterrent for many customers. Most dentists require substantial down payments before beginning treatment, reducing the number of cases the company can start.
Align is aiming to correct this problem by offering financing plans directly to consumers. In this way, patients get treatment from their dentist but pay Align directly. Align aims to offer all sorts of financing plans in order to make the financial load on consumers easier.
However, like with most forms of more niche consumer credit, this comes with significant risk. Cosmetic dentistry is up there is the sort of luxury goods that consumers buy during good times, but regret if the economy goes south.
Now, I know Align is pushing every lever they can to keep their growth rate up. Still, you have to wonder how wise it is to roll-out high risk consumer lending in year nine of the American economic recovery.
How much lower will unemployment rates go from already historic low levels? Are consumers’ salaries going to go up even more? Is the outlook likely that the economy will get better or worse from the current level?
If I owned ALGN stock, I’d be nervous that the economy is about to hit a rough patch, and my direct-to-consumer lending will lead to write-offs.
Align is making a point of playing up its potential in overseas markets. And I understand why. When you think about it, the wealthy markets have naturally limited growth. It’s important to remember that once a customer has their teeth treated, they are unlikely to need/want treatment again.
Gilead Sciences, Inc. (NASDAQ:GILD) shareholders learned this lesson painfully a few years ago, if you cure something, you earn far less than you might expect as you get no repeat customers.
And in developed markets, the portion of the population that is young is declining markedly. Yes, I know more adults are interested in cosmetic dentistry. Still, as the populations skews increasingly over toward 65+ers and teenagers shrink in their fraction of society, orthodontics isn’t going to be the hot spot in the health care market.
Turning to other developed wealthy markets, you find similar demographic trends. Align has made a fortune marketing orthodontics to people who didn’t want traditional braces. But what will fuel continuing growth after the easy fruit was picked?
The Emerging Market and ALGN Stock
Align has also succeeded because braces are really expensive in the United States and other developed markets. If a treatment is already going to cost $5,000 or $6,000 anyways, the difference between traditional options and Invisalign is probably small.
The cost of labor, malpractice insurance, office rent, etc. makes up a large portion of costs, so Align can get away with relatively high prices. It doesn’t seem like they are charging that much, since the alternative is so also expensive.
In my travels through poorer countries, including Mexico and Spain to mention two reasonably large markets, Invisalign generally cost nearly twice is much as traditional braces.
Invisalign still cost a large premium to the cosmetic nearly-invisible ceramic brackets as well. In a country like Mexico, where the minimum wage is $5/day, Align isn’t going to get much uptake charging twice what traditional braces cost.
And in other emerging markets throughout Asia and Latin America, braces are a status symbol for youths to show they have money. Thailand went as far as to ban fake braces earlier this year after social media stars were promoting wearing fashion braces as a trendy accessory.
In a market like that, how is Align going to sell their product at a far higher price? In Colombia, where your author lives, an absurdly high portion of the 18-29 female population, including a fair number of models, wear metal braces.
Again, good luck to Align in these sorts of emerging markets, where there is little stigma based on appearance.
ALGN Stock: Super Expensive
Once you realize that there is a lot less emerging market growth coming versus expectations, and that developed markets will slow down for Align in coming years, ALGN stock starts to look like a massive trap. It’s selling at more than 80x trailing earnings, and at more than 60x forward earnings.
Incredibly, this $22 billion company sold just $1.3 billion in product and earned just $269 million in net income last year. That’s absurd for a company whose natural addressable market size just isn’t that big.
There’s few hidden assets or other drivers of value in ALGN stock either. Book value is just $14/share, and there are few assets supporting the ALGN stock price.
And at more than 100x free cash flow, don’t expect any meaningful capital return via dividend or share buyback, as the company hardly retains any cash after operations.
Throw in the fact that the United States’ economic recovery is long-in-the-tooth, and that Align’s new consumer financing plans appear badly timed, and ALGN stock looks like a major trap. For folks that hang on too long, expect major discomfort going forward.
For an easier to swallow alternative, consider Dentsply Sirona Inc (NASDAQ:XRAY). XRAY stock offers concentrated exposure to the dental industry at 21x forward earnings and a healthy EPS growth rate.
At the time of this writing, the author owned GILD stock and had no positions in any of the other aforementioned securities. You can reach him on Twitter at @irbezek.